‘Witching’ Sparks Volume Bursts Following Stock-Market Lull

(Bloomberg) -- In a week when even a hawkish Federal Reserve failed to shake the equity-market lull, Friday brought some fireworks.

Stock transactions spiked amid a quarterly event known as triple witching, when options and futures on indexes and equities expire. Almost 15 billion shares changed hands on U.S. exchanges, about 40% above the three-month average, while the benchmark slipped 1.3%, the most in more than five weeks.

While the robust volume offers a window of trading liquidity, it can also make it hard to tell whether a stock’s move is driven by adjustments related to option expiration or by a change in business fundamentals, according to Matt Tuttle, chief executive officer at Tuttle Capital Management LLC.

“When you get one of these events, you get noises around share movements,” Tuttle said by phone. “It messes up the information that we’re seeing.”

The quarterly expiration, once called “quadruple witching,” usually coincides with a rebalancing of benchmarks such as the S&P 500, sparking single-day volumes that rank among the highest of the year. According to an estimate from Howard Silverblatt, senior index analyst at S&P, the rebalance in the index alone could force $30 billion of stock trades.

Read more: How Many Witches Are Beguiling Stocks Today? It’s Just a Trio

Of particular interest were trillion dollars of options tied to benchmarks like the S&P 500, whose expiration Goldman Sachs Group Inc. and Nomura Securities say may open the door for turmoil.

How the dynamics work is a complicated process that the average investor may find it hard to grasp. But in the eyes of Charlie McElligott, a cross-asset strategist at Nomura, the selling of options linked to volatility has created a “long gamma” condition where options dealers -- who typically need to hedge their positions by buying or selling the underlying stocks -- tend to go against the prevailing market trend.

Before Friday, the market was stuck in an eerie calm. Measured by the 20-day volatility, the S&P 500’s price swings dwindled to levels not seen since the start of 2020. The technical backdrop is perhaps why equities held steady in the face of the Fed’s hawkish surprise earlier this week.

“‘Equities stable on hawkish Fed guidance’ is the wrong read here,” McElligott wrote in a note to clients. “Equities are stable for the same reason they’ve been chopping for weeks: markets continue choking on an oversupply of gamma from vol sellers!”

Similarly, Goldman strategists including Rocky Fishman blamed the long gamma positioning for the dormancy. More than $2 trillion of S&P 500 options and futures were scheduled to expire Friday, Goldman estimated.

“The extremely low SPX realized volatility is consistent with the possibility that 18-Jun has left ‘the street’ long index gamma, in which case realized volatility could pick up once positions are cleaner,” Fishman wrote in a not

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